Thursday July 26, 2007 - 11:19:06 GMT
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Black Swan Capital - www.blackswantrading.com
The Biggest Dollar Bears of Them All -- The U.S.
FX Trading â€“ The Biggest Dollar Bears of Them All â€“ The U.S.
And the dead dollar bounce continues; at least for now.
Traders seem to be looking at the buckâ€™s rapid slide and saying, â€śToo far, too fast.â€ť After all, the U.S. Dollar Index tested an important psychological support level at 80. Should the dollar break below 80, the next level of support is also the last level of support â€“ the all-time low for the U.S. dollar index.
Thatâ€™s a frightening scenario and perhaps one that traders arenâ€™t ready for.
As far as the fundamental backdrop goes, things arenâ€™t getting any better for the buck either.
â€˘ Existing home sales in the U.S. stunk up the joint yesterday, moving to a five-year low.
â€˘ Investors are having lots of trouble determining the severity of this subprime mess, wondering if this is cause enough for the Federal Reserve to ease up on their monetary policy.
â€˘ Additionally, oil prices are ticking higher. Thatâ€™s hitting the U.S. economy harder than some other countries whose currency appreciation has helped soften import costs of crude oil.
These factors are all part of why the greenback has depreciated so rapidly lately. But theyâ€™re all fairly recent developments, emerging within the last year or two.
But is this any reason for the dollar to be so extremely weak versus its counterparts, i.e. U.S. dollar index near its all-time lows?
Stephen Jen, of Morgan Stanley, points to a much more overarching reason.
The Biggest Dollar Bears are in the U.S.
Jen is convinced that U.S. real money investors have been diversifying away from the dollar since 2003. Mutual funds, private pension funds, state and local pension funds, and life insurers make up the four classes of U.S. real money accounts â€“ as is tracked in the Fedâ€™s Flow of Funds data.
According to Jen, â€śAs of 1Q07, the total assets under management by these four categories reached U.S.$20.7 trillion, up from U.S.$12.6 trillion in 1Q03.â€ť He also points out that the current $20 trillion worth of assets is nearly four times the size of the worldâ€™s official foreign reserves.
And based upon a steady rise in mutual fund allocation to international equities from 2003 to 2007, one can assume the four categories to show similar increases; increases resulting in massive amount of capital outflows leaving the U.S.
Itâ€™s hard to say the reason for the diversification. It could be a combination of many. It could simply be a global trend of portfolio diversification. But considering the size of U.S. real money assets, you can bet the dollar will be impacted the most by a trend of home currency diversification.
All the talk of dollar diversification in key areas overseas, coupled with heavy dollar diversification in the U.S., is probably why the buck has been so weak for so long.
The question now â€¦ whatâ€™s the trigger that flips this trend and sends dollars flowing back into the U.S.?
John Ross Crooks III
Black Swan Capital
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